It Begins.

In July of 2003, Didier Sornette wrote this:

A very interesting additional information point is provided by the behavior of the main currencies against the US dollar. We have found unmistakable LPPL signatures of a speculative bubble which is presently developing on the Euro. Specifically, Specifically, the Euro in US$ exhibits a typical accelerating LPPL bubble pattern, which is suggestive of a speculative herding buying of Euros using US$. Similarly, the Euro in Yen also exhibits a typical accelerating LPPL bubble pattern, leading to a similar conclusion. In contrast, the Yen in US$ does not have any acceleration (nor has the US$ in Yen), even if a marginally significant log-periodicity may be observed. These three analyses provide a remarkable message: the depreciation of the US$ is not just the undirected flight-for- safety of a herd fleeing from a looming catastrophe; it seems to be associated with a speculative bubble directed to what is felt (at least on the short- and medium-term) to be the new haven currency, the Euro.

Here's the bubble he's talking about, which is the Euro versus the dollar:

And here's the reverse of that bubble, that I've been talking about, which is the Dollar versus everything:

The euro is a part of that "everything" but there are other big parts - like the Japanse yen and thereupon hangs a tale. This gets a little tricky, but follow me here, because the most-fascinating thing about an LPPL bubble is that you can actually watch people's thinking change as they go through the phases of the bubble.

So back in March, you can see that the dollar was about to make a turnaround. Of wise and prescient Japanese, the Financial Times wrote this:

Japanese savers convert yen into dollars

By Lindsay Whipp in Tokyo

Published: March 18 2008 20:13 | Last updated: March 18 2008 20:13

Not everybody is shunning the dollar, it seems. Since the US currency started its descent against the yen last summer, some Japanese people have been trying to gauge when the currency is cheap enough to start buying back.

During the past few months Japanese banks have seen an increase in the value of deposits in dollars in foreign currency deposit accounts.

At some banks an increasing number of customers have opened such accounts in anticipation of buying dollars at what they consider to be the right time

Wow, were those Japanese ever right on the money!...here's the yen versus the dollar:

By June, the huge bubble of dollars (more dollars = lower price, so it's sort of a "down bubble") had popped. The price of the greenback was roaring back to life, so the Financial Times wrote this:

Risk-hungry investors shun a weakening yen

By Peter Garnham in London and Andrew Wood in Hong Kong

Published: June 16 2008 18:37 | Last updated: June 16 2008 18:37

The yen has weakened 10 per cent to the dollar in the past three months as improving risk appetite and a widening yield disadvantage have led investors to abandon the Japanese currency.

The yen appreciated rapidly in the first quarter of the year as the US Federal Reserve slashed interest rates and the financial crisis intensified.

Here's that Yen again:

Once again, the yen - although it went up really fast - was not *in* a bubble itself when it made that big spike on the left of the chart. But it was *part of* the bubble of everything versus the dollar. Therefore that slope down you see on the right was not an anti-bubble in the yen, but it represents the yen being caught up as a large element of an anti-bubble.

One of the amazing things about anti-bubbles is the predictable, roller-coaster oscillations they go through. We're starting to go through an oscillation in the price of the dollar, and it's starting with the yen. So now - referring to that little upwards hook on the far right of the chart - the Financial Times writes this:

Reversal of carry trade makes a star of the yen

Published: September 12 2008 17:19 | Last updated: September 12 2008 17:19

The yen has been the star performer on the currency markets over the past month as investors have sought refuge from the recent upheaval.

Japan’s economic fundamentals have not changed. Indeed, the authorities are warning of a recession and there is little prospect of the Bank of Japan raising interest rates, which currently stand at just 0.5 per cent.

However, it was the low-yielding yen’s part in feeding the rise in asset prices – which have reversed so dramatically recently – that has boosted the currency.

Carry trade investors sold the yen heavily to fund the purchase of riskier, higher-yielding assets elsewhere.

Now those positions are being reversed as investments are liquidated across a range of asset classes and regions across the globe.

This article represents something so interesting: the kind of argument traders will use to justify their bubble/anti-bubble psychology in "truth" and "objectivity". It's not that these things may not be true, it's just that they don't matter right now. What matters is the psychology of the traders. Right now, the trade of buying the dollar and selling everything else has become too easy. The market was moving too fast. Suddenly the conviction is gone. We have that moment of rest in the roller-coaster the train goes up. There's a break from fear and you can catch your breath. People like this break from fear so the "dollar-down, everything-else-up" psychology will get stronger. Remember, the traders are people who only months ago believed that the dollar would go down forever. The yen will be one of the "explanations" for things "getting back to normal". You can also see it starting in the euro. I don't know what the "explanation" for strength in the euro will be yet, but it doesn't matter. The important thing is that it's coming.

The bewildered panic will reverse for a while. Oil, gold, everything will eventually go up at least a little and the dollar will go down. Everyone will feel comfortable for a moment......

..... and just when they do: whoosh, hands up in the air and everybody yell!

May you live in interesting times